The cost for big companies to supply your home with power has come down significantly, but don't expect your energy bill to come down any time soon.
Once cost reductions are passed on, however, there is the potential for a double-digit decline in the price you pay for energy.
I say "potential" because any energy deflation is not yet set in stone.
Let's say, for argument's sake, that energy prices do come down. This will help the Reserve Bank in its quest to achieve its inflation target of between 2 and 3 per cent.
Household budgets would be boosted twice: once by a reduction in their energy bill, and possibly by lower interest payments on their mortgage.
But how realistic is this outcome?
The wholesale electricity price plummets
The wholesale price of electricity has halved this year.
But before we go any further, let's look at the market itself.
The wholesale market — or the National Electricity Market (NEM) — is the power system that connects the east coast of Australia, including Queensland, NSW, the ACT, Victoria, South Australia and Tasmania.
The NEM wholesale market is where generators (coal-fired power stations, which use coal to generate electricity) sell electricity and retailers buy it.
Each state has its own "spot" price for electricity — the price the electricity generators, like coal-fired power stations, receive for the power they supply.
The spot price also tells generators how much electricity the market needs at any moment to make sure the lights stay on so, for example, the spot price rising is a signal that production needs to be ramped up.
Retailers then on-sell said electricity to households.
There are around 30 retailers and over 100 generation companies in the NEM.
OK, so back to the wholesale price of electricity halving this year.
It's largely due to the end of "hyper" commodity inflation.
"The wholesale cost of electricity has come down more than 50 per cent year on year in [calendar year] 2023 because the hyperinflation of gas and coal commodity prices internationally over 2022 has now in 2023 progressively come off [more than] 70 per cent from their peak," Climate Energy Finance Director Tim Buckley says.
The pandemic, war in Ukraine and local flooding all saw the price of commodities, like coal, soar through 2021 and half of 2022.
Coal is used to generate electricity. Since the middle of last year, however, coal supply, globally, has picked up.
"Export thermal coal prices are still double long-term averages, but way down on the near 1000 per cent increase that precipitated the collapse of the National Energy Market (NEM) last June," Buckley says.
There are other factors that have helped lower the cost of wholesale prices.
"The Albanese government price cap has played a key short-to-medium term intervention that was critically needed," Buckley says.
"And thirdly, new replacement zero emissions generation capacity and battery firming capacity is progressively coming online, particularly more than 3.2GW of new rooftop solar capacity in the last 12 months alone."
How's that for people power? Total electricity supply by fuel type saw renewables — wind, grid-scale and rooftop solar, hydro and other sources — contribute 38.9 per cent of total supply, up 4.6 per cent.
Why bills aren't coming down
So we've established that the wholesale cost of energy has come down significantly and there are a variety of reasons for that.
So why can't households see a significant cost change on their energy bill now?
Simply put, over recent decades, big Australian coal producers have been incentivised to export their product offshore because, on the east coast at least, there's been no mechanism in place to ensure a certain amount stays onshore.
Tim Buckley describes it as "a long-term Australian government energy policy failure".
"Coal miners and gas extraction companies [could] choose to supply either market, and so they take the best price available," he says.
"As such, Australians now have to compete with international buyers when sourcing our energy from our own public resources.
"Our successive governments failed to put in safeguards to ensure long-term domestic demand is covered, and only the surplus is exported.
"We now face the hard choice of paying export price parity to use our coal and gas, or we miss out if we can't afford it.
"So when the thermal coal price in Asia rose tenfold to US$500/tonne, the largest coal-fired power plant in Australia, Origin Energy's 2.88GW Eraring plant, was left entirely exposed.
"It had a choice of not operating, or buying coal at export prices of up to US$500/tonne at the end of 2022,10 [times] the price Eraring paid for coal for its first 40 years of operation."
This led, in part, to what’s known as the Default Market Offer (DMO), which is set by the Australian Energy Regulator (AER).
It ensures households don't pay ridiculously high energy bills while allowing retailers to recover their costs.
But there's a problem.
The retail price of electricity has an in-built 12-month lag by design. The default market offer is set annually with effect from July 1.
This means the energy bill relief could be in place now, but the system does not allow it.
We asked AGL and Origin to explain their pricing decisions this financial year.
AGL said it sets prices for variable market offers for the financial year ahead, but some customers are also on the DMO, set by the regulator. In other words, AGL customers are on two distinct pricing structures.
Origin told the ABC that none of its customers are paying above the relevant default market offer (DMO/Victorian Default Offer) following its most recent mid-year price changes, with most of its customers on market offers paying less than the default price.
How much less? We don't know.
Origin told us it will conduct its annual review of prices again mid-next year in line with the regulator reviews of the VDO and DMO.
We also asked the regulator (AER) if there was any mechanism where the DMO could be lowered before July 1, 2024, to reflect the change in the market?
It had not provided a response at the time of publishing.
LoadingInflation and interest rates
The wholesale price of electricity is roughly 30 per cent of the total cost that goes into the bill you receive in your mailbox or via email.
That said, any household bill relief, I suspect, would be welcomed by millions of Australians.
"The wholesale price of electricity has come down 50 per cent," Buckley says.
"This should, all things being equal, lead to lower electricity prices from July 1 next year.
"So Climate Energy Finance expects electricity price relief to be on the horizon, we expect a double-digit decline in the DMO in some Eastern states come July 2024."
So significant energy bill relief, all things being equal, is on the way.
Will this materially lower inflation in the second half of next year? AMP says yes.
"Our June 2024 CPI (inflation) forecast is 3.7 per cent year on year — a bit lower than RBA at 3.9 per cent," AMP deputy economist Diana Mousina told The Drum.
That would push the inflation rate just inches (0.7 percentage points) from the Reserve Bank's inflation target.
Remember interest rates now are in what's known as restrictive territory, so interest rates should fall once the RBA's target inflation rate is achieved.
Right now bills and interest rates are elevated, but if enough factors fall the way you need them to, both bills and interest rates fall.
But the reality is household budget relief that could be available now, is not.
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